Indian equity markets are on a roll as Nifty has crossed the psychological mark of 20,000. According to share market analysts, consistent investments from FII, DIIs, and retail investors have pushed Indian indices to reach historic highs. The remarkable achievements of the G20 Summit have also drawn the attention of global investors towards the Indian markets.
Nifty covered the 1000-point journey from 19k to 20k in 52 trading sessions and this positive momentum is likely to continue going ahead as well, said Siddhartha Khemka, Head - Retail Research, Motilal Oswal Financial Services Ltd. "Strengthening of India’s positioning in the global arena along with resilient economy would keep the earnings growth robust and provide fuel to the market," he added.
Robust flows from the local investors amidst mixed/negative flows from foreigners has helped Nifty touched 20,000 milestone. Successful achievements recently in space and foreign diplomacy by India has also boosted sentiments for Indian stocks generally in an era when the global situation is still shaky. Markets experts believe that at 20,000, Nifty market valuations are high, but not stretched.
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“Nifty has finally managed to touch the much anticipated 20,000 mark in the second attempt post July 2023. Small-cap and mid-cap stocks have run up quite sharply and in some cases unjustifiably so. Review of asset allocation and booking some profits/raising some cash is advised," said Dhiraj Relli, MD & CEO, HDFC Securities.
Short-term trends show that divergence in valuations between mid-cap, small-cap and large-caps is widening. Small-caps generally outperform the large-caps in the long run. However, as per market analysts, pockets of the small-cap space are now over-valued. The mid-cap and small-cap indices are up by 38% and 44%, respectively, from the low levels of March this year. In comparison, Nifty is up by 15% since March lows.
The outperformance in mid-cap and small-cap space is attracting huge mutual fund flows into the mid-cap and small-cap segments, lifting their valuations beyond fair levels. Investors must be cautious about this exuberance. "Recently, large caps seemed to had taken a pause while rally was seen in the broader market. But now large caps too have slowly started participating and thus going ahead we can expect the up-move to be led by both large caps and mid-small caps," Siddhartha Khemka, Head - Retail Research, Motilal Oswal Financial Services Ltd.
At 20,000, Nifty is trading at 18.5 times FY25 estimated earnings. This is higher than the long-term 10-year average of 17.5. The high valuations make India the most expensive large market globally. At high valuations, the market is vulnerable to corrections. However, analysts believe that corrections will be steeper in the broader market. So, for now, safety is in quality large-caps, according to them.
Brokerage firm Axis Securities in a note said the strong catch-up by midcaps and small-caps in the last couple of months has lowered their margin of safety as compared to large-cap stocks. "Keeping this in view, the broader market may see some time correction in the near term and flows are likely to shift to large-cap stocks. However, the long-term story of the broader market continues to remain attractive," it said.
According to analysts at Kotak Institutional Equities, the last lot of the new favourite mid and small-cap stocks fall in the dubious category of ‘turnaround’ stories. "Many of these companies have been through serious operational and financial challenges (including bankruptcy) in the recent past, but the market has high hopes of these companies doing well in the future. We are not sure of the basis of the market’s confidence," it said.
According to analysts at Elara Capital, Mid-cap/small-cap valuations are one SD above long-term average and close to previous highs (except the Covid lockdown phase). But mid-cap/small-cap valuation, relative to the Nifty, is still well below the previous highs. "We are in the early part of an earnings upgrade cycle that kicked off in early CY2023. This can support the rally despite high valuations," it said.
Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Business Today. Investors should consult their financial advisors before taking any position